Housing prices have stopped going up and it is coming back to bite people who took out large debt consolidation loans using their home equity. The people who are hit the hardest are the ones who have also lost their jobs and need to relocate. The Detroit area has been particularly hit hard.
Lets say someone consolidated $50,000 worth of debt using their home as equity. They purchased their home for $150,000 and still owe about $150,000 on it. The home had appreciated to $200,000 so the consolidation company suggested they use that $50,000 in equity to pay off their debts. Since the new loan was at a lower rate, the amount they were spending each month goes down and they now start spending the extra–maybe even buy a new car or incur additional debt. Now that the housing market is going down their home may only be worth $120,000 if that. They owe $80,000 more on their house than what it is worth.
If their job requires them to move, they may not be able to sell their house because it would require bringing a tremendous amount of money to the table just to let someone else buy it.
This is a good example of how consolidation loans can be dangerous. Getting a lower interest rate is only helpful if you are going to be disciplined and pay things off faster. Otherwise it can put you in a deeper bind.
